SINGAPORE (July 10): Phillip Securities Research says oil prices are expected to fluctuate widely in the near term as the oil market embraces higher volatility.

“On the one hand, the market will continue to price in geopolitical risks such as trade war tensions and output disputes. On the other hand, the proceeding of the Fed rate hike cycle and shrinkage of balance sheets in major central banks could slow the recovery of the global economy,” says analyst Chen Guangzhi in a Monday report.

Riding on the tailwind of shrinking inventories, WTI and Brent crude oil prices have rallied in the recent three consecutive quarters. In June, Brent hit three-year highs of US$80/bbl.

US Energy Information Administration (EIA) data point to a depletion of excess US crude inventory over the past three quarters, Chen says. At the same time, the current oil supply level is also lower than expected.

“The status will probably persist as stockpiles are moving downward,” Chen says. “Therefore, we believe oil prices will be supported at above US$70/bbl.”

The way Chen sees it, the global oil market is under the pressure of future supply shortfall, especially with the increased likelihood of sanctions on Iran, which produces some 3.8 million bbl per day as of May.

Already, the US has urged Saudi Arabia to increase output by 2 million bbl per day. However, this may face challenges as Saudi Arabia has reported that the spare capacity is expensive to turn on.

The US itself has been increasing production, but Chen says the production could encounter bottlenecks such as in pipeline capacity, obsolete infrastructure, and lack of workforce. “Hence, US production growth may slow down in the near term,” he adds.

Meanwhile, signs are indicating that there is little room for OPEC to pump more oil on a larger scale.

“In a nutshell, the resumption of lifting global oil supply could be outstripped by the stronger demand,” Chen says.

While the offshore drilling and production activity has shown signs of bottoming out in 1H18, Chen notes that day rates were still on the downtrend. “Those operators subject to higher operating costs barely benefited from the market turnaround,” he adds.

“We are encouraged that major oil players are reporting strong earnings since 4Q14,” Chen says. “But they were still cautious and prudent on the oil market outlook since the expected capex in 2018 is just slightly higher than that in 2016.”